Bankruptcy is a last-resort option for someone that cannot pay the debts they owe. In bankruptcy, the person’s property may be sold to repay as much debt as possible before most remaining debts are dropped. Bankruptcy can cause major damage to a person’s credit score and financial future.
What Does Bankruptcy Mean?
The process of going bankrupt is overseen by the federal government, specifically federal bankruptcy courts. Many people who face this situation may try to navigate it alone, but it is best-advised to consult with a financial attorney that specializes in bankruptcy to assure a smooth and relatively painless process.
Legally, bankruptcy is a process that was created to assist both individual people and businesses in resolving Debt, or portions of their debt. This may sound incredibly helpful and possibly even benign, but it is critical to understand that officially declaring bankruptcy has very serious consequences that can have long-term effects on your credit. This could mean potentially being denied financial assistance in the future.
In declaring bankruptcy, it is important to note that this is a very complex process. You may need to meet certain criteria or requirements before you can successfully file for bankruptcy. You will also need to prove that you cannot or are unable to repay your debts. In addition, you will likely be required to complete credit counseling with a counselor specifically approved by the government. This is all to assure that your finances can be assessed and you’re able to ask any and all questions regarding your situation including more details on potential alternatives.
What Are Some Effects of Declaring Bankruptcy?
Again, declaring bankruptcy may seem like a simple solution to resolving your debt. Some of the pros of declaring bankruptcy are eliminating debt that is crippling your everyday life. Debt like credit cards, tax debts, and even certain student loans. Declaring bankruptcy also can give you protection from your creditors. Bankruptcy may even prevent collection calls—no one likes those. Essentially, having the ability to be debt free in less than a year allows a fresh financial start.
However, there are also lasting negative effects and also more immediate consequences that will affect your day-to-day life. An obvious effect is your loss of property or non-exempt assets.
In a legal proceeding for bankruptcy, it may be required of you to give up any possessions that may have significant monetary value. This Repossession of items by the government means that your assets can be put up for sale to cover the cost of your lost debt. This property can be anything from your home to your car or other items you may own that hold value. In addition, while declaring bankruptcy can eliminate most debts, there are some that by law, may be excluded from this action. Therefore, you may still be left with some debt. These debts include a majority of student loan debt (though some loans can be), court-ordered debts like alimony and child support, reaffirmed debt, government penalties or issued fines, court fines, and federal tax debt owed directly to the federal government.
Does Bankruptcy Mean I Have Nothing To Spend?
In essence, bankruptcy, generally speaking, means you are unable to pay certain debts, mostly large ones. However, this doesn’t mean you have absolutely nothing to your name once you declare bankruptcy—or rather, this doesn’t mean you aren’t able to borrow money again.
As mentioned previously, when you declare, you will need to attend credit counseling with a government-approved credit counselor to discuss your debts and spending at length. You’ll also go over how to spend with things like secured credit cards, prepaid credit cards, and debit cards, to give yourself hard limits on daily spending.
More often than not, people spend the money they earn from work and fail to keep track of where their money goes, specifically. Sure, we all know rent or mortgages are necessary to pay. And we know we need to pay utility bills. But it goes deeper than that, and credit counseling can help you get back on track.
How Early Is Too Early to File Bankruptcy?
This is a question that many young individuals ask themselves. It makes sense. In your mid-twenties it becomes increasingly difficult to save simply because you haven’t quite established yourself financially, yet, and perhaps might not have the best spending habits.
The fact is, the earlier you come to terms with your financial situation, the earlier you learn that it can be better. If you feel that you may need to take a step back in spending, or your debt has you spinning out of control, consult a debt counselor/credit counselor immediately. It may not be too early, and you may be able to catch yourself before further debt increases.
What Are My Alternatives to Bankruptcy?
Understandably so, when debt becomes unmanageable, you’re forced to consider multiple options for next steps, including bankruptcy. That said, there are several other solutions that have the potential to assist you even better, including consulting a credit counselor.
A couple other options available are: looking into consolidation loans and renegotiating your payment plans. The lender may consider a new payment plan after they look at your repayment history to decide the best course of action. This may be a scary conversation to have, but when it’s necessary, it could help you greatly.
A debt consolidation loan is a loan taken out by a borrower who needs to pay off individual debts in a collective payment. This loan is often offered by a third-party provider who specializes in combining various loan types (student debt, credit card, etc.) and consolidating them so the borrower can repay the loans in a single payment on a different timeline. This is not loan forgiveness, but it is a new way, and potentially easier way, to proceed in paying your loans when they become unmanageable.